There is some risk in writing an article like this. It discusses pricing for professional services; getting it wrong in either direction can cause problems for the supplier, customer or both, and the risk is that the problems and solutions outlined are misunderstood. However, the principles I’ll describe below ultimately benefits the end customer, and so I hope it will educate and inform, and so in turn benefit more end customers.
This all starts with a few assumptions. Based on 8 years of quoting for and delivering fixed-price creative work, I have found that customers who buy design (eg. web design, graphic design) or development (software development, web development) work for a fixed price think that most or all of the following are true:
- the quote reflects a specific number of hours work
- reducing the requirements will reduce the price
- all of the hours charged for are spent actually doing the graphic design, programming, or whatever skilled work is being charged for
- the price is equal to number of hours multiplied by a fixed hourly rate
Many web designers, graphic designers, developers and consultants start out in their business also believing that these things are true. However, within 1-2 years it becomes obvious (usually when the bank account is empty) that these things are not true.
Let’s work through a few examples and find out where this model breaks down, and why so many creative professionals struggle to build a viable business.
Why Price is not related to Time
Meet Danny. He’s a graphic designer who’s just bought a shiny Mac, picked up a 2nd hand copy of Photoshop from eBay, printed some business cards, and built himself a flashy website. Let’s walk through a few example customers at various stages in the life of Danny’s small graphic design business.
Example 1: Danny thinks he’s earning £25/hour, but it’s actually £14.
Jimmy asks Danny to quote for designing some business cards. He’s a friend of a friend so is expecting a keen price, and Danny is eager to get some business in. Danny reckons his previous salaried job paid £10/hour, and he knows some designers charge £50/hour, so he tells Jimmy it’ll be £25/hour. They have a chat on the phone, agree that hourly rate and roughly what design features Jimmy wants. Danny considers how long it’ll take to knock something up in photoshop and quotes Jimmy 4 hours. Jimmy, being an experienced buyer, says “oh come on mate, surely it won’t take that long to push a few images around in photoshop?”, and wanting to please him, Danny says “yeah you’re probably right, it shouldn’t take more than 3 hours”.
Danny manages to end the phone call after 40 minutes, then makes a coffee and starts flicking through stock photos and images that will give fit in with Jimmy’s requirements. He spends a few minutes reading an email from Jimmy with even more detailed requirements, realises it will take a bit more time but feels “bad” about going back to Jimmy to re-quote, so he reasons that “it won’t take that long, maybe 10 minutes more so I’ll stick with the quote”.
He then needs to go out for a while to attend to something else, comes back to his desk and takes a bit of time to get the ideas flowing. Within an hour or so he’s emailed Jimmy a couple of design ideas.
Several hours later Jimmy replies, very happy but with a few comments and changes, and Danny happily throws himself back into the work. 5 minutes later the phone rings – it’s a different customer and Danny has to talk to them for 20 minutes about their project. They’re unhappy about several things and after the call Danny feels completely deflated. He keeps pushing ideas around on the screen for Jimmy’s cards but is worried about the other customer’s job and can’t focus. He fails to achieve anything for the next hour.
The next day he feels better and gets on with Jimmy’s cards, and within half an hour has emailed Jimmy a final design for approval. Jimmy phones up and raves about how great it is and how there will be plenty of work in future, for 20 minutes, and Danny then spends 20 minutes getting the file in a print-ready state, then uploads it to the local print shop. He pays for the cards to be delivered straight to Jimmy.
He then emails an invoice to Jimmy for £25 x 3 hours. Having only recently started his business, he’s got other projects to focus on, and doesn’t think any more about the invoice until 4 weeks later. He’s a bit nervous about chasing money so emails Jimmy a very polite reminder. Fortunately Jimmy has simply overlooked it, and emails back to say he’s out of the office but will put a cheque in the post. A week later Danny is wondering where the cheque is, and after a couple of phone calls Jimmy finally posts a cheque. Danny then spends 20 minutes posting the cheque to his bank and updating his accounts system.
Now for the sum: Danny quoted £75 for the work, and it’s true that he only spent 3 hours actually doing the design work. Let’s look at how much time Danny spent which, if the job did not exist, would not have been needed: 40 minute call, 10 minutes thinking/coffee, 10 minutes email, 1 hour focussed work, 1 hour unfocussed/wasted, 30 minutes focussed work, 20 minutes call, 1.5 hours sending, chasing, and processing payment. Total time taken up by the job: 5 hours 20 mins, so Danny’s real hourly rate was just £14/hour – just over half the rate he thought he was earning, and he had to wait 6 weeks for the money.
Example 2: Danny quotes at £30/hour but makes a loss
Danny has learned from his past experience and is now quoting at £30/hour. However his outgoings have also gone up. He is paying himself £1000/month to cover his household bills, and £500/month on business expenses, and he knows he should be saving 10% for his tax and accountants bill, so he reasons that he needs to invoice £1700/month to break even. He knows that he can do 30 hours/week of design work, and reasons that therefore he only needs to be billing £13/hour to break even. Even so, he feels as though there is never any money so he starts quoting at £30/hour to try and make a profit.
Let’s skip the detail this time: a new customer turns up, and after 3 hours of meetings (taking up 5 hours including travel), 3 hours putting a specification together, 1 hour tweaking and sending it to the customer, and 1 hour discussing it on the phone, he gets a purchase order for his biggest ever job priced at £10k. The customer asked for a discount and Danny, wanting the work desperately, volunteers to do it for £8k.
The customer pays a £3k deposit and Danny catches up on some overdue bill payments.
Three months later, Danny is struggling to find time to finish the work, partly because he’s got technical difficulties and partly because he’s struggling for cash, having used all the deposit money and having had no time to do other work due to the big job. He’s also having to spend time delaying bill payments and trying to do smaller jobs to bring some cash in quickly.
In the meantime the big customer misses an important marketing deadline, and their relationship with Danny sours. He’s finally managed to find a bit of motivation, and completes the job, delivering it 1 month late. The big customer has some problems with the work he’s delivered, and he spends another 2 weeks getting all the issues sorted out, until finally the customer signs off.
Being friendly and flexible, Danny had no formal contract in place with the big customer, and so when they tell him they will pay a further £2k but no more due to his failure to deliver costing them the missed deadline and missed sales, there isn’t much he can do except send out a few angry tweets. Luckily his outburst on twitter goes unnoticed, and he does receive the final payment.
Danny gets another shock when he adds up the time he’s spent on the project. Instead of his estimated 330 hours, he’s spent just over 650 hours on it. Due to the shortfall of cash while he did the work, he had to spend a further 20 hours dealing with people chasing him for money. He’s also had to wait a further 5 weeks and spend 4 hours chasing the final payment.
Total time that wouldn’t have been needed if the job did not exist: 674 hours, for £5000, = £7.41 per hour. His break-even mark is £13/hour so you could argue that he’s made a loss of £5.58 for every single hour he worked on the project – a total loss of £3762!
Example 3: Danny finally profits, or does he?
Danny has now learned a lot and thinks he’s cracked pricing. He now has an assistant and an office so his monthly business overheads have more than doubled to £4k. He reckons that between him and his assistant he can deliver 260 billable hours per month, giving him a break-even cost of £15.38 per hour if they are both fully occupied.
He’s even realised that the actual design work is probably just 40% of the overall project time, and has priced it appropriately. With growing expenses but still wanting to be competitive, he’s now pricing work at £40/hour, and starts work on a project he’s estimated at 600 hours and priced at £24k spread over 4 months.
During the project, his assistant has a week off sick, and a week on holiday, there are 2 bank holidays, and £1300 of unexpected expenses to replace a broken computer and pay an annual bill that had slipped his mind. At the same time, the customer, who has built up a great relationship with Danny, asks very nicely if he could “just add this new requirement in, it’s probably just a quick thing”. This happens several times throughout the project. The increased business has also given Danny more management and admin work to do; book keeping, wages, looking after the office, so the number of billable hours he can do has decreased.
The project goes well and is delivered on time, and Danny reckons he must have made a profit of 600 x (£40 – £15) = £15k.
However, the holidays and sickness account for 78 lost billable hours, and he’s had £1300 of unexpected expenses, and he’s only been able to fit in a couple of other small jobs around this big job and he knows those were too small to make a profit. So over 4 months which he reckoned should have 1040 billable hours, he’s actually only done 600 at £40. Total business overheads during that time were £16k and so his profit is just £8k – a whole £7k less than he was expecting.
It gets worse; while he was working on this project, Danny wasn’t selling or even looking for work, and it takes a further month before he gets more paid work in. That month still costs £4k, which can only come from the profit he made on the last job, so the big project was really only worth £4k in profit, for 5 months of work!
How to Quote for Creative, Design and Development Work – Three Dirty Secrets
Here’s what I learned from my time as “Danny”, followed by an argument that, actually, this is good for the end customers.
1. The skilled work could be less than 40% of the overall hours:
Here is what you should account for when costing work as a number of hours, on the basis that nothing else is going to pay for this time, and it’s time that is required because the job is being done:
- time already spent discussing the work and making the sale – meetings, calls, emails
- time spent writing a quote – this often requires research, but can take several hours in its own right
- time spent delivering a quote and closing the sale – typically a phone call or meeting will be required to talk the customer through it and chase a purchase order
- planning the work – writing/drawing a project plan and discussing with staff and suppliers
- research – a surprising amount of time may be required to learn about any new methods, technologies or related work that are required for this job
- preparing the environment – getting software and files set up ready to work on, and setting up any collaboration tools if you’re working with others
- doing the work – the more often you get long periods of focussed, uninterrupted time, the less costly this will be
- delivering the work – this can take a surprising amount of time, and only experience will teach you which customers will require a lot of time at this stage. It could include installing files on a website, printing, explaining, training, and many other things
- maintaining the work – the client will expect to be allowed a few minor changes after delivery, some more so than others. This applies particularly to software development; if you are not charging a monthly maintenance and support fee, you need to account for a good number of hours of bug fixes, maintenance and training in your initial price.
In my experience, the actual “doing” part is often less than 40% of the overall hours. However, that leads us to the next “dirty secret”:
2. Customers only want to pay for the “doing” hours:
If you’re hiring a plumber, and he charges for 2 hours, you would expect him to spend 2 hours doing plumbing. It’s natural to expect that if you’re paying for X hours of a skill, that those X hours are spent using that skill. So how do we keep customers happy without going bankrupt?
Lawyers and solicitors have had this worked out for years: they charge for the “doing” hours, but at a higher rate which more than covers the non-“doing” hours!
Let’s go back to Danny’s last job for a moment. The customer wants to know his hourly rate for the design work, and he knows that the customer is talking about the time he spends on the “doing”. Danny knows that only 40% of his time (240 hours) is “doing”, and he’s priced the job at £40/hour for 600 hours, so the correct rate per “doing” hour, the rate the customer wants to know, is actually £100/hour!
You can use this as a tool; you know it’s easy to price up the actual creative work because that’s “your thing”, so ignore all the rest – simply price up that at 2.5 times the hourly rate you actually want to earn for the hours you have available. Easy!
That leads us on to the last dirty secret…
3. Costing Price and Quoting Price are Different!
Remember when Danny’s customer asked for a discount? Danny made the customer very happy with 20% off, but he wouldn’t want to lose 20% of his income all the time.
How about the unexpected expenses Danny incurred during his long project?
Nobody else will account for these things, and prices can only be negotiated downwards, so it’s important to factor in a number of different things when going from the cost of the hours to the price you quote the customer. Here are some examples:
- multiple technologies: does the work you deliver need to be tested on a number of different technologies? For example a modern website will need to work on at least 8 different web browsers and 3 different operating systems. All of this increases the risk of problems during and after delivery. As an example, at my old company we added 30% to the price of any web work that needed to be compatible with Internet Explorer 6 (for the non-techies – a particularly troublesome bit of software).
- awkward customers: You’ll become more skilled over time at figuring out the “hassle factor” of dealing with a particular person or company – it could be down to bureaucracy, a specific technology, personality, or just lack of knowledge about the work you do, but the point is that in order to deliver a good service, you need to be getting paid for the time and effort you put in. The more clearly you can explain what, how and why you do your work, the less of an issue this becomes.
- specification changes: wouldn’t it be great for customers if you could handle all those unexpected changes that occur half way through a project? Simply price them in to begin with! As you become more experienced, you’ll realise that some customers won’t fully know what they want until you start delivering it, and to make them happy, you need to be able to react and adapt to shifting goal posts. If you price the work correctly, that won’t be a problem, so make a conscious effort to learn from, rather than grumble about, specification changes.
- discount allowance: many customers will immediately try to negotiate a discount once you quote – it makes them feel good, so if you are dealing with a skilled buyer who you know will want to negotiate, add the amount that you’re willing to let them negotiate to the price before quoting. The worst case now is that the customer goes away happy and you get the price you wanted, and best case is that you get more money for doing the same job. People don’t buy unless they are happy with the price, so there should be no moral issues for you here.
As you can see, this area of pricing is something that requires plenty of experience, great relationships with your customers, and confidence in your own skills and abilities. With practice, it will allow you to set the right expectations, handle unexpected changes, deliver on time and make enough profit to grow your business.
Remind me, why is all this good for customers?
I said at the top of the article that I believe all of this is ultimately good for both parties. Let’s first look at what customers want from professional services:
- value for money: rubbish is cheap and top quality is not, so if you are the cheapest by a long way, the message you give is that your service is not great. If you are by far the most expensive, the message is that you are too arrogant to care about the customer’s budget constraints.
- kept promises: customers may try and force deadlines onto you, but you still have to agree to them, so with practice you should be able to meet all of your promises.
- show of interest: the customer is passionate about his or her goals, so if you share that passion by learning about what they do and spending time with them, you’ll have more influence over and a far better understanding of the requirements, allowing you to deliver a better service and give realistic advice and promises.
- expertise: the customer is paying you to do this work because they lack either the time or the expertise to do it themselves, so you need to be good at what you do. By charging enough to make a profit, you can grow your business and expand your expertise and knowledge, becoming more valuable to your staff and customers.
So here is why I think these customer needs are met by the realistic pricing produced by implementing the dirty secrets:
A profitable, stable business that pays you enough to live comfortably gives you more time, less stress, and more credibility.
That credibility reassures your existing customers that you’ll always be there for them, and helps bring in new customers by word of mouth.
The lack of stress allows you to get back to being creative; to do the things that made the customers value your expertise in the first place, and to produce consistently higher quality work.
The extra time allows you to spend more time getting to know your customers and their needs, time to keep up with your industry, learn new skills, practice your craft, handle emergencies, and grow your business effectively.